Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
Cryptocurrency's popularity has skyrocketed in recent years, and Uncle Sam is ready to collect.
Prices of cryptocurrencies like bitcoin and ethereum hit their all-time highs in November 2021 amid a frenzy for digital assets. Platforms like Coinbase and Robinhood made it easy to buy and sell cryptos, and investors rushed to take advantage of the exciting investment opportunity. Fast-forward about a year, and it’s a different story. Crypto prices have plummeted in part due to interest rate hikes from the Federal Reserve that have weighed on financial assets across the board, including stocks and bonds.
Still, many Americans own crypto — around 16% of adult Americans, according to a White House report published last year. Younger investors especially have an affinity for the asset: Among single individual filers, 4.5% of millennials reported taxable crypto transactions last year, a higher share than any other generation.
Oh, and speaking of taxes, here’s an important reminder for people invested in cryptocurrency: Crypto profits are taxed.
"The IRS has indicated it believes there is a great deal of underreporting when it comes to cryptocurrency, and that they’re ramping up enforcement efforts to combat it," says Andrew King, vice president of tax policy and research at Goldman Sachs Ayco Personal Financial Management. "While the principles around the taxation of cryptocurrency are continuing to evolve, cryptocurrency investors who overlook taxes are more likely than ever to hear from the IRS."
With Tax Day right around the corner, here's what you need to know about how crypto is taxed.
Crypto taxes guide
When do you have to pay taxes on crypto?
There are different ways crypto is used, from buying and holding to getting paid in crypto to making purchases. Not all of those uses are taxable events, says Lisa Greene-Lewis, a certified public accountant (CPA) and tax expert with TurboTax.
Here's when there are tax implications for cryptocurrency:
Sell for profit or loss
Like with stocks, investors need to pay federal taxes on cryptocurrency profits. The IRS considers virtual currencies property, which means that investors need to pay taxes on capital gains.
The amount of tax you owe depends on how much you earned in profit and how long you owned the crypto before selling it. If you owned the crypto for less than a year, you'll owe short-term capital gains taxes, and if you owned it for more than a year, you'll owe long-term capital gains taxes. (Short-term capital gains are usually taxed at a higher rate — see below.)
If you sold crypto at a loss you can, like with stocks, offset other gains with those capital losses — thereby lowering how much you owe in taxes. The crypto market has struggled a lot since the 2022 filing season, so if you sold recently, it’s important to check whether you can offset gains.
Earn income from mining
Buying crypto isn't the only way to get the digital asset: Some people earn cryptocurrency by mining. Cryptocurrency mining is how new coins are created, by way of complex algorithms miners use computers to solve. Miners are then rewarded with crypto.
Miners are taxed much like freelancers, Greene-Lewis says. If you earn cryptocurrency via mining, it should be reported on a 1099 tax form at the fair market value of the cryptocurrency on the day you received it.
Earning staking rewards
Staking is a way to generate passive income on your cryptocurrency. Staking is similar to mining in that it is part of the transaction validation process for certain cryptos, but staking — unlike mining — happens via a mechanism called proof of stake. If you stake your crypto, you're participating in this process and can earn rewards, but those rewards are taxed.
Crypto users may, at some point, receive an airdrop from crypto projects and developers. An airdrop is free crypto sent out to users (often as part of a marketing campaign), and it's taxable income you'll have to recognize when filing taxes.
Buying goods and services with crypto
More and more retailers allow you to spend your bitcoin, ether and other cryptocurrencies on goods and services. But because the IRS sees cryptocurrency as property, you need to pay taxes on its appreciation when you exchange it for a product.
"The next time you think about using cryptocurrency to pay for something, remember that you are also going to have to report a gain or loss from disposing of that cryptocurrency on your tax return," King says.
Exchanging one crypto for another
Before you can exchange one crypto for another, you technically need to sell that first cryptocurrency. If you sell at a gain, you need to pay taxes on that exchange.
Take the fair market value of the cryptocurrency you're receiving and subtract the one you're giving up to recognize either a gain or loss, Greene-Lewis says.
When do you not have to pay taxes on crypto?
Remember, not everyone who owns crypto will owe taxes this year.
Here's when you don't have to pay taxes on cryptocurrency:
Buying and holding
Just buying and holding cryptocurrency isn't a taxable event. Similar to other capital assets, like stocks, even if the value of the crypto increases, it's not a taxable event until you sell.
If you transfer your holdings from one crypto wallet to another, you're not selling anything, and it is not a taxable event.
Donating crypto to charity
Charitable contributions are tax deductible. The deduction is generally equal to the fair market value of the crypto at the time you donate it if you held it for more than one year. If you held the cryptocurrency for a year or less when you donate it, your deduction is the lesser of your basis in the crypto or the crypto's fair market value at the time of your contribution.
King notes that the IRS recently reiterated that if a taxpayer is claiming a deduction of over $5,000 for a donation of cryptocurrency to charity, the taxpayer must obtain a qualified appraisal, which is evidence of the deduction. Failing to do so can result in the IRS disallowing the entire deduction, he adds.
How much tax do you pay on crypto gains?
When you sell cryptocurrency, you must recognize any capital gains or losses on the sale and your tax liability. That means if you sell your cryptocurrency when its price is higher than the price you bought it for, you owe taxes.
Whether you owe short- or long-term capital gains taxes depends on how long you held the crypto before selling or exchanging.
Short-term capital gains
If you held the cryptocurrency for one year or less before selling, then you'll have a short-term capital gain or loss. Short-term capital gains are generally taxed by the IRS at the same tax rate as ordinary income.
Federal income tax brackets for 2022
|Married filing jointly
|Up to $10,275
|Up to $20,550
|$10,276 to $41,775
|$20,551 to $83,550
|$41,776 to $89,075
|$83,551 to $178,150
|$89,076 to $170,050
|$178,151 to $340,100
|$170,051 to $215,950
|$340,101 to $431,900
|$215,951 to $539,900
|$431,901 to $647,850
|$539,901 and up
|$647,851 and up
Federal income tax brackets for 2023
|Married filing jointly
|Up to $11,000
|Up to $22,000
|$11,001 to $44,725
|$22,001 to $89,450
|$44,726 to $95,375
|$89,451 to $190,750
|$95,376 to $182,100
|$190,751 to $364,200
|$182,101 to $231,250
|$364,201 to $462,500
|$231,251 to $578,125
|$462,501 to $693,750
|$578,126 and up
|$693,751 and up
Long-term capital gains
If you held the cryptocurrency for more than a year before selling, then you'll have a long-term capital gain or loss.
Long-term capital gains tax brackets for 2022
|Married filing jointly
|Up to $41,675
|Up to $83,350
|$41,676 to $459,750
|$83,351 to $517,200
|$459,751 and up
|$517,201 and up
Long-term capital gains tax brackets for 2023
|Married filing jointly
|Up to $44,625
|Up to $89,250
|$44,626 to $492,300
|$89,251 to $553,850
|$492,301 and up
|$553,851 and up
How to file crypto taxes
Address the crypto question on Form 1040. Taxpayers will have to address whether they owe taxes on crypto pretty immediately when filling out Form 1040 (the standard tax form filed by individual taxpayers). At the top of the form, you’ll see the following question: "At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell,exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” You might notice this language is different from last year’s. The IRS replaced the term “virtual currencies" with “digital assets” and expanded the instructions for answering the question. More information on that — and help deciding when to check “yes” and when to check “no” — can be found on the IRS website.)
Note that if you only bought cryptocurrency last year and have not sold any of it, you will not be required to check the “yes” box, says Eric Bronnenkant, head of tax at Betterment.
Report your capital gains and losses. Any capital gains and losses need to be reported on Schedule D of Form 1040. You may also need to report capital gains and losses on Form 8949.
Report all your crypto income. If you were paid in cryptocurrency or mined cryptocurrency, you'll also need to report that income on Form 1040.
How to keep track of crypto for taxes
When you trade stocks and bonds, brokerages are required to provide you with a 1099 or similar tax form(s) with all the information you need to report gains and losses on your tax return. Crypto exchanges will also be required to send 1099s for tax year 2023, but you shouldn't expect a 1099 tax form from cryptocurrency exchanges for tax purposes this year as the new rule didn’t affect tax year 2022.
"This means that you, as the taxpayer, will have to compile all of the necessary transaction data on your own in order to report the necessary income, gains and losses on your return," King says.
The more organized and up-to-date you keep records of where you trade cryptocurrency, the easier it will be when the time comes to file your tax return, he adds. Your records should include as much relevant information as possible, including the date of each transaction, the type of transaction, the cryptocurrencies involved in the transaction, and the U.S. dollar value of the cryptocurrency at the time of the transaction, King says.
If you're using a tax software preparer like TurboTax, it may be a little easier. TurboTax has partnered with cryptocurrency trading platforms, including Coinbase and Robinhood, to let users automatically import thousands of crypto transactions at once.
How to pay taxes on NFTs
Non-fungible tokens (NFTs) are digital assets, like art, exchanged via blockchain technology. While the tax rules around NFTs were previously unclear, the IRS recently clarified that taxpayers must “report all digital asset-related income” — and that NFTs are considered digital assets. This income needs to be reported on your Form 1040.
What if your crypto exchange went bankrupt?
We saw a plethora of bankruptcies in the crypto industry last year, including the closely watched downfall of the major exchange FTX. If you invested in crypto on an exchange that’s gone under, what does that mean for your taxes?
If you held crypto at an exchange that is involved in bankruptcy proceedings and your crypto assets are frozen, there may be claims made against the company. In that case, a bankruptcy court will eventually determine the distribution of assets (if any are available) — so you will have to wait to claim any losses, Greene-Lewis says.
“Typically, if an asset could still potentially be recovered, you cannot take a loss on your taxes yet,” she adds.
If you are waiting to find out if you will recover any of your crypto or whether the crypto will be deemed unrecoverable, the best thing you can do right now is gather your documents related to your crypto account, Greene-Lewis says. But if a crypto company’s bankruptcy is settled and discharged and your crypto is deemed worthless, you can offset the loss as explained above.
Of course, if you're unsure how to navigate this — or any — tax situation, it may be best to reach out to a professional for help.
Getting your tax refund in crypto
After you file, if you want to get your tax refund in crypto, you can. Last year, TurboTax teamed up with Coinbase to allow its customers to have their tax refunds automatically deposited into a Coinbase account where they can then choose to convert it to cryptocurrency. Coinbase confirmed the option is still available this year.
Crypto taxes FAQ
How to avoid capital gains tax on cryptocurrency
If you sell your cryptocurrency and make money off it, you need to pay taxes on it. But you can use tools like TurboTax's cryptocurrency tax calculator to determine how much less you'll have to pay in taxes if you hold your crypto for more than a year versus selling it less than a year after buying it.
And remember: If you had crypto losses when you sold, you can — like with stocks — offset gains with those losses.
What happens if you don't report cryptocurrency on taxes?
You need to pay taxes on your cryptocurrency gains. If the IRS gets wind that you did sell cryptocurrency for a profit and didn't pay taxes, they would probably adjust your return based on what they think you owe, Greene-Lewis says.
"It would definitely be better for you to report that," she adds.
Failure to report all your income and gains to the IRS can lead to penalties, interest and, in extreme cases, criminal charges.
How much tax do you pay on crypto gains?
Whether you owe short- or long-term capital gains taxes depends on how long you held the crypto for before selling or exchanging.
If you held the cryptocurrency for one year or less, then you'll have a short-term capital gain or loss. Short-term capital gains are generally taxed at the same tax rate as ordinary income. If you held the cryptocurrency for more than a year and sell it for a profit, then you'll have a long-term capital gain, which will likely be taxed at a lower rate than a short-term gain.